Beware the Ides of March – at least if you’re a gold investor.
March has a nasty habit of producing reversals in the gold market.
This year looked like being an exception. The first two weeks of the month saw gold’s near-vertical start to the year continue. Just as Julius Caesar began to get complacent when the Ides came with no apparent trouble, so perhaps did gold investors.
And then the correction began.
Today we play the role of soothsayer and ask how bad it will get: is gold about to get murdered?
Gold has slipped back – but it’s still looking good
After hitting a high on Monday at $1,392 an ounce, gold was trading at $1,350 yesterday.
After a $200 rise in two months and a bit, and the extreme sentiment that pours out whenever gold has a rally like this, some kind of pause for breath was due.
By pause for breath I mean some kind of retracement. To retrace half of those gains would not be abnormal.
However, even if that happens, I have to say that gold is starting to look pretty good again. On the chart below, I have defined gold’s downtrend since its late 2012 highs with two blue tramlines. You can see the very definite breakout, which I have circled in red, at the $1,325 mark.
Meanwhile, gold is sitting above its 21-day simple moving average (the green line in the next chart), the 55-day (orange) and the 144-day (blue). And all of these averages are all sloping up.
Gold has even broken above its falling 52-week moving average (red). A further confirmation that we have a new trend in place, will be if this flattens out and starts rising.
Trends are powerful things. They can go on for many years, and the signs are that a new one is developing. The alignment of the moving averages is not yet ideal and there many hurdles to get through before we can even think about re-testing the old highs of 2011 – let’s just get to $1,500 first, or even $1,400 – but the omens are good.
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I’ve tried to identify some of those areas of resistance on the chart below. These are potential areas where gold might stall in the coming months, should its rally continue. Again it is a one-year chart.
There’s resistance just below $1,400, at $1,425, $1,475 and a huge wall of it at about $1,520.
As for this current downturn, there’s support at $1,350, $1,325 and strong support at $1,275 and $1,250-$1,270. And of course, there’s $1,180.
I’m going to stick my neck out and say we go back as low as $1,300 or just below on this correction – perhaps by June – but not much further. To give back $100 after a $200 rise is not abnormal.
It could just as easily consolidate at $1,325 or $1,350 – in fact, $1,350 is the low of the day so far – but bold predictions are more fun (and you’re more likely to be wrong), so we’ll go with, hmm, $1,275.
If you like these things, you’ll notice what a lovely W-shaped bottom gold has put in with its July and December 2013 lows.
Watch this crucial mining deal
But I think that by Monday, we’re going to get a big clue as to the direction of gold and, particularly, gold miners over the next few months. One thing that kick-started this rally in January was the proposed takeover of Osisko Mining (TSX:OSK) by Goldcorp (NYSE:GG) for $2.6bn – $6.78 a share. Osisko is now trading at a dollar premium to that.
Osisko is having a conference call tomorrow to try and recommend that shareholders reject the deal. The offer closes on Friday. Goldcorp will then either have to up the ante or walk away from the deal.
Whatever the companies decide will send a big message to the market. Osisko is a not a cheap producer – it is not producing gold at $500 an ounce. If a bulk-tonnage, low-grade miner is considered to have value at $1,350 an ounce and it gets taken out, that sends a very positive message to the market. All those people invested in other possible take-out candidates will stay long – and other money will follow.
But if the Goldcorp walks from the deal, then the message is rather more negative and the opposite will happen. Other speculative money will also walk.
So it’s worth keeping an eye on that. It’ll give a good idea both on how bullish sentiment really is in the gold industry, and it could help shape the direction for gold in the short term.
However, whatever happens in the short run, the longer term trend is still looking positive. And I’ve got an itchy feeling that gold’s going to come in pretty handy over the next couple of years, Ides of March or not.
• Follow @dominicfrisby on Twitter.
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